Key Business Issue

Moon administration’s economic policy outlook and 5 year agenda

2017-07-31

The government released its five-year agenda and economic policy outline this week, promising people-oriented, income-led growth to create a society without polarization. As the Moon Administration’s economic policy direction has taken a major shift from growth to distribution, we will take a closer look at what kind of effect it will have on Korean society and what kind of issues need to be addressed for the policies to be effective with economic analyst Jung Cheol-jin. Let’s first take a look at the government’s economic policy blueprint.

What is the most important message for the Moon Administration’s economic policy? Focus on people. The government promised to put people first rather than corporations in its economic policy. To this end, the government plans on pursuing income-led growth with a focus on jobs, fairness and innovation. We’ve already heard a lot about income-led growth and the government’s focus on job creation, but fairness has to do with the Fair Trade Commission’s initiative to stamp out irregularities and unfair practices, especially among those who have power and use that power for their gain. The last focus, on innovation, has to do with the Fourth Industrial Revolution and how we must tackle this issue along with the message that our economy will move from being centered on large corporations to small and medium sized businesses and ventures.

The Moon Administration first discussed “people-centered economy” saying that for the past 20 years, conglomerates have seen growth while earned income remained stagnant. It pointed out that the gap between conglomerates and high income earners and SMEs and low income earners has widened. In order to resolve this issue, the government will focus on increasing income and jobs while establishing fair market order. To do this the government will be digging into state coffers.

In a broad sense, the government is planning on actively intervening in the market. For the next five years, the Moon Administration will actively make use of government finances to stimulate growth and create a people-oriented economy. Korea’s current account growth rate is between 4% and 5%, but the government’s guidelines suggest it will spend more than the growth rate. In other words, government finances will lead the Moon Administration’s economic policy geared toward income-led growth. Income-led growth is only attainable with increased household income and spending. To start that off, the government believes it should be through government finances and market intervention.

The previous administration estimated the fiscal expenditure growth rate at 3.5% on average per year. However, the Moon Administration analyzed that it will not be enough to handle growing demand for welfare. That is why the government will operate higher fiscal spending than the growth rate. It plans on using financial assistance to increase income and create more jobs in what it calls “income-led growth”. The government also revised up the economic growth forecast from 2.6% to 3%.

Until the end of last year, private and public economic research institutes had a pessimistic view of the Korean economy. However, with exports booming from the beginning of this year, the growth forecast has been revised up for many institutions. This is why the Moon Administration believes 3% growth is attainable. The biggest basis for this belief is the supplementary budget. The Korean economy has been struggling because of weak domestic demand, but the supplementary budget will have the effect of boosting domestic consumption. This has caused economic research institutions to estimate that the supplementary budget will have the effect of raising the growth forecast by 0.2%p. Since the Bank of Korea’s economic forecast is currently at 2.8% adding the 0.2%p means the growth forecast will reach 3%.

The government’s upward revision for the economic growth rate shows its confidence. The expansion of exports and investment as well as a supplementary budget of eleven trillion won has been reflected in the revision. The government predicts that positive signs will also show in the employment market. Starting in the second half of this year, a growth in the number of jobs and increased income will create a fractional effect to help with domestic demand. If the Korean economy does reach 3% economic growth, it will be the first time in three years that it surpassed the 2% growth range. However, some point out that the forecast is overly optimistic, while others worry about economic resources.

The biggest worry stems from economic resources. Historically, successful cases stemming from the government’s active intervention in the market are hard to find. Also, if the real estate market starts to see a decline, or if there is a decline in corporate tax due to companies suffering, we will see a fiscal deficit in the next five years. That is why relying heavily on government finances is a double edged sword. We have to keep in mind that it will be very difficult to find another solution if government finances start to suffer for some reason.

The biggest problem is where the money will come from. If the fiscal expenditure growth rate does expand to 7% as the government forecasts, fiscal expenditure will snowball to 490 trillion won by 2020. The government said it will come up with the finances needed by taxing the rich and adjusting expenditures.
However, the amount that can be additionally secured through increased corporate and income tax only amounts to 3.8 trillion won per year. Also, it remains to be seen whether the Korean economy will be able to handle a higher government expenditure growth rate compared to the economic growth rate.

The Moon Administration’s main focus has been job creation. It believes that everything can be solved through employment. However, jobs cannot be created through increased government expenditure alone; it must also be felt in the private sector for it to start hiring more people. In other words, additional efforts such as reforming the labor market should be made for the Moon Administration’s economic policies to be successful.

The Moon Administration’s economic policy direction begins from the thought that the Korean economy is stuck in a low-growth rut and polarization has deepened to the point of crisis. As the economy is in need of a new paradigm, we should all put our heads together to come up with measures for co-prosperity.